Stock option grant practices have been the subject of recent guidance from the Securities and Exchange Commission (SEC), and continue to be scrutinized by various parties for compliance with the tax requirements of the Internal Revenue Service (IRS). If stock options are an important part of your incentive compensation programs, this may be a good time to review and tune up your stock option grant practices. Here are some thoughts on best practices for both privately held and publicly traded companies:

1. Timing of grants and setting the exercise price

One of the basic requirements for most stock options granted in the United States, to receive the desired tax treatment, is that the exercise price be set no lower than the fair market value of the underlying stock on the date of grant. Some suggestions for best practices in making grants within this framework are:

• No “backdating” of stock options (applies to both privately held and publicly traded companies). Backdating refers to the practice of granting a stock option with a grant date earlier than the date of on which the stock option is approved or other corporate formalities are satisfied. Backdating was sometimes used in years past to attempt to set the exercise price of options using a lower stock value as of an earlier date than the approval date. However, the practice did not comply with tax rules and typically led to accounting irregularities, so it is effectively not permitted. In the current context,...

Read Full Story: https://www.foley.com/en/insights/publications/2022/05/tuning-up-stock-option...